Wednesday, September 10, 2014

Thursday Roundup, 9/11/2014

Yee hawg, blawgers. It's time for your weekly-or-possbly-biweekly-(I'm-not-sure-if-"biweekly"-means-once-every-two-weeks-or-twice-a-week-and-I'm-too-lazy-to-look-it-up) roundup of links from around the magical world of the econ blawgosphere!

1. Dan Wang (a welcome new voice in the blogosphere) explains why Peter Thiel believes in technological stagnation. Fortunately, unlike Thiel's earlier National Review article, the case does not rest on the idea that the U.S. government is massively understating the rate of inflation.

2. John Cochrane is going to take people who use sloppy vocabulary when talking about bank capital over his knee and give them a hiding! Go cut Pappy Cochrane a switch!

4. Steve Williamson, Mage of St. Louis, casts a spell of shadow over the Phillips Curve, money supply targeting, wage-price spirals, and the entire notion that low interest rates cause inflation. If you're sure you know how inflation works, read Williamson and tell me if you're still so sure.

5. David Andolfatto shows that deflation ain't so bad as long as you see it coming, thus refuting an argument that very few people make. Tell that to the HINDENBURG, Andolfatto. In other news, I've decided that David should be a Count, because "Count Andolfatto" just sounds right, doesn't it?

6. Roger Farmer has invented an easier way of estimating DSGE models with multiple equilibria. There's a math error on page 22. Can you spot it?

11. Narayana Kocherlakota: The 70s are over, people. Does that mean the Franco-Prussian War is over? Oh wait, wrong 70s. Anyway, yes. Everyone who's stuck in the 70s should read Kocherlakota and take his words to heart, but of course won't.

12. Chuckle darkly at the excuses of the manager of a failed hedge fund. Then realize that he's a bazillion times richer than you will ever be, and weep gently onto your keyboard, in the process causing you to accidentally "good" a really lame post on EJMR.

13. Should we use TFP as a measure of welfare? Not if it's mismeasured, say I. There's evidence that labor utilization actually leaks into our TFP measures, so this idea might not be as snazzy as it sounds. Interesting idea, though.

14. Chris House makes a good point, which is that Noah Smith is always right about everything DSGE models are actually a subset of Agent-Based Models.

15. Brad DeLong tells the epic tale of the evolution of the yield curve over the last decade. Or at least, an epic tale that may or may not have anything to do with the evolution of the yield curve over the last decade.

"Chris House makes a good point, which is that... DSGE models are actually a subset of Agent-Based Models."

Utter nonsense. No rational expectations model can be agent-based because you are imposing coordinated beliefs on individuals without modeling the process by which such coordination may or may not be attained. You can make a case for DSGE over ABM if you like, but there's no excuse for so completely misrepresenting the ABM methodology.

No rational expectations model can be agent-based because you are imposing coordinated beliefs on individuals without modeling the process by which such coordination may or may not be attained.

That's not right. Rational expectations need not be based on coordination at all. Imagine each agent is trying to figure out how the economy works, and she gets a private signal of this by observing the world around her. This signal is equal to the model in which she is being described, plus an idiosyncratic mean-zero error term. That is rational expectations. No coordination was required.

Rajiv, You are viewing the broad spectrum of ABM with a very narrow lens. Your definition only holds insofar as the implementations you are familiar with (Axtell et. al). By no means is that an encompassing definition.

Mathematically, DSGE is a special case of ABM. Just write out the definitions as sets and see for yourself.

Noah, seriously, if you don't assume that the subjective beliefs match the objective probability distribution then you don't have RE. And if you assume that they do then you don't have an ABM. It's not complicated.

I have worked extensively with equilibrium models, with and without common priors. They can be very useful and I am not a critic at all of the general approach. I have also worked with ABMs (in fact giving a talk on them tomorrow at the Rethinking Economics conference in NYC). There are lots of variations, but none that use equilibrium methods. I believe that these models should get more attention and be published more widely, but also understand that they are hard to evaluate. I'm not dogmatic on the issue. But I really don't like imprecise and contradictory definitions. Saying that DSGE is a special case of ABM is not just wrong, it makes the case for pluralism harder to make. And yes, this bothers me.

ZHD, Oranges are just a special case of Zebras. You are viewing the broad spectrum of Zebras with a very narrow lens. Your definition only holds insofar as the implementations you are familiar with (striped mammals). By no means is that an encompassing definition.

Mathematically, Oranges is a special case of Zebras. Just write out the definitions as sets and see for yourself! QED....

Rajiv: You're defining ABMs as any models that don't assume rational expectations. But models that don't model the beliefs of agents do not include rational expectations. And models in which agents are assumed to have behavioral biases (e.g. overconfidence models of asset pricing) do not include irrational expectations. By your definition, these are agent-based models. Similarly, by your definition, a model that models the actions of agents without a centralized market, but assumes rational expectations, is NOT an agent-based model.

I do not like your definition. I do not think it is conducive to model-making or understanding.

Noah I did not define ABMs at all, I just stated some implications of the definition. Here's a proper definition, from Leigh Tesfatsion, one of the pioneers and practitioners:

"Agent-based computational economics (ACE) is the computational modeling of economic processes (including whole economies) as open-ended dynamic systems of interacting agents... ACE modeling is analogous to a culture-dish laboratory experiment for a virtual world. Starting from an initial world state, specified by the modeler, the virtual world should be capable of evolving over time driven solely by the interactions of the agents that reside within the world. No resort to externally imposed sky-hooks enforcing global coordination, such as market clearing and rational expectations constraints, should be needed to drive or support the dynamics of this world."

There's more detail on her page:

http://www2.econ.iastate.edu/tesfatsi/ace.htm

I do not have a private definition of ABM, I am using the consensus definition by practitioners. It rules out any modeler imposed global coordination devices, including those used in equilibrium models with behavioral biases such as overconfidence.

I don't know whether you're being deliberately obtuse or just lazy, but either way you are creating confusion about a promising and clearly defined method that is very different from the equilibrium approach (where the latter includes but is not confined to DSGE).

Noah, there is a group of researchers who have been hard at work for a couple of decades now developing models which do not rely on "externally imposed sky-hooks enforcing global coordination." They have a clear and useful definition of the methods they are using and they are doing creative, original, and (in my view) important work. Leigh Tesfatsion (along with Blake LeBaron) is a pioneer and prolific contributor. Now you come along and want to redefine what they are doing so that it encompasses precisely the methods they are trying to escape from. Fine, go right ahead, but at some point people will stop taking you seriously. I already have.

No one is trying to redefine what they are doing. Tesfatsion very carefully chooses her words when she defines ACE. Unlike what you're proposing, she does not say "this is what ABMs are." The mere fact that she so named her research as ACE is an implicit acknowledgement that she has chosen to pursue a specific construct in the ABM universe. And there's absolutely nothing wrong with this.

You trying to put forth the existing implementations of ABM research as ABM itself is like trying to make the argument that Java is Object Oriented Programming whereas nothing else qualifies. I'm a little surprised that you would be so narrow-minded.

In the broad space of agent-based modeling, there will be new entrants as time progresses and interest accumulates.

To believe that the current implementation axioms are the defining set of what should constitute ABM research in economics is not only academic hubris, but complete ignorance of how actual programmers and computer scientists attempt to solve problems.

Rajiv, chill out. I am not trying to devalue what those people are doing.

But it's quite possible that a wide class of those models leads to a result that looks just like a result that can be achieved with a Rational Expectations model. That certainly happens often in the laboratory! And there are models of learning that suggest it could happen in many of the kind of ABMs you are talking about.

Of course you can get convergence to consistent expectations in an ABM, just as you can have market clearing, but they this has to be endogenous, resulting from actions taken by agents in the model, not exogenously imposed as an equilibrium condition. Even adaptive expectations models often converge to RE, this does not make them RE models. Quite the contrary. Leigh makes this perfectly clear in her comments on Chris House's post.

Whatever your intention, you are misrepresenting the work in a way that creates confusion for outsiders. I'm not angry (as per your tweet), just disappointed. You seem open-minded and have an audience, you could really do something constructive. But you seem more interested in being funny or sounding clever than in really thinking about what we are trying to say.

Imposing RE on a model is methodologically unacceptable from an ABM perspective, as practitioners like Leigh and Blake (and I and my many colleagues at the Santa Fe Institute) understand it. As I said above, saying that DSGE is a special case of ABM is not just wrong, it makes the case for pluralism harder to make. The only reason I have wasted so much time responding to you is that you have argued for pluralism in the past. But enough is enough, this will be my last comment on this.

"Among the most famous (and spectacular) agent-based models is John Conway's Game of Life (if you've never seen a simulation of this you really must). In economics, the earliest such models were developed by Thomas Schelling in the 1960s, and included his celebrated checkerboard model of residential segregation."

Yes Rajiv. But then you say this: "What you cannot have in an ABM is the assumption that, from the outset, individual plans are mutually consistent. That is, you cannot simply assume that the economy is tracing out an equilibrium path. "

However, one way to implement Conway's Game of Life violates both of your claims.

I'm recommending that you think more abstractly — more like a programmer and less like an economist. The domain of ABMs strongly belongs to the former.

yes "Louis" is quite right - you need to become a Very Serious Person Indeed.Also, how about a column for BV on Lagos-Wright and NME. Enough with old claptrap RBC and NKE and get into the 21st century!

I would suggest that longandvariable's "smackdown" of Minsky is a joke. So there are models with multiple stable points? Duh, what else is new. Yes, Minsky's argument is not mathematical, although it can certainly be mathematized. It is a psychological/behavioral argument that there is at least some evidence for in history, with Minsky's old pal, the late Charles Kindleberger, providing strong support in his classic _Manias, Panics, and Crashes_, which Paul Samuelson said was the most important book about investing ever written, and it is based heavily on Minsky's arguments. So, the argument is that a long period of stability and good times tends to reduce risk aversion and, yes, tend to destabilize things as less and less safe lonas get made. This is all highly endogenous, but many would say that we saw this in the 20s and the 90s and again in the housing bubble. longandvariable's invocaton of models that do not do this does not remotely undo this argument.

BTW, this links with the discussion of ABMS, pretty clearly, and I could cite some of my own work ont this, but will try to avoid becoming boring and tedious and obvous.